Crypto Amplifies Financial Risks in Emerging Markets, BIS Report Finds

Cryptocurrencies such as Bitcoin (BTC) have failed to mitigate and instead “amplified financial risks” in less developed economies, according to a new study published by the Bank for International Settlements (BIS).

On August 22, the Consultative Group of Directors of Financial Stability (CGDFS) released a report on cryptocurrencies titled “Financial stability risks from crypto assets in emerging market economies.”

The study was conducted by BIS member central banks within the CGDFS, including those in Argentina, Brazil, Canada, Chile, Colombia, Mexico, Peru, and the United States. The document emphasized that the views expressed are those of the authors and “not necessarily the views of the BIS.”

According to the authors, cryptocurrencies like Bitcoin hold out the “illusory appeal” of being a quick solution for financial challenges in emerging markets.

“They have been promoted as low-cost payment solutions, as alternatives for accessing the financial system and as substitutes for national currencies in countries with high inflation or high exchange rate volatility,” the study reads. As cryptocurrencies allegedly extended the financial stability risks of emerging markets, authorities have many policy options to address those risks, ranging from outright bans to containment to regulation, the report notes.

At the same time, there are also risks if central banks and regulators react in an “excessively prohibitive manner,” the paper reads, adding that such policies may drive crypto activities into the shadows. The authors added:

“While crypto-related activities have not fulfilled their stated goals to date, the technology could still be applied in various constructive ways. Creating a regulatory framework to channel innovation into such socially useful directions will remain a key challenge in future.”

The central banks mentioned Bitcoin exchange-traded funds (ETFs) as one of the major potential market risks in emerging markets, as such products are able to lower the barriers to entry for “less sophisticated investors” and increase their exposure.

Among the risks, the study’s authors mentioned a situation where Bitcoin ETF investors “own no crypto assets but still face large losses when the price of Bitcoin drops.” Additionally, crypto futures-based ETFs “may increase price volatility and amplify risks if they hold a significant portion of the futures market,” the document notes.

Related: Ripple joins BIS cross-border payments task force

It also appears somewhat unclear which emerging markets are specifically implied in the study, as many jurisdictions in this category, including China and Pakistan, have been quite restrictive in terms of crypto regulations. Equally, it is not clear whether the situation is different for more developed countries.

The BIS did not immediately respond to Cointelegraph’s request for comment.

Though not necessarily expressing the views of the BIS, the study is another sign that the authority is cautious about the adoption of cryptocurrencies like Bitcoin. In another report in July, the international financial institution reiterated its high skepticism over crypto, pointing to commonly cited issues such as the instability of stablecoins and the purported irreversibility of smart contracts.

On the other hand, the central bank spoke highly of central bank digital currencies. “By underpinning the future monetary system, CBDCs would be the foundation upon which further innovations are built,” the authority wrote.

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